He was in his office with three of his employees — a man and two women — and me. The door was closed. I'd known Charney long enough to be unsurprised. I first met him in 2004, when his company, American Apparel, had only a handful of stores. By the end of 2007, it had more than 180 stores from New York to Seoul, Korea; revenue in the $380 million range; and more than 4,000 employees at its Los Angeles headquarters, the largest garment-manufacturing operation in the United States. Once obscure, the brand had become famous.

Or maybe infamous, since much of the attention Charney and his company got along the way tilted toward the sensational. His idiosyncratic lifestyle received much scrutiny following a magazine article in which the writer vividly mulled Charney's sex life. And let's face it, when a successful entrepreneur stands with no pants on in front of a journalist, the journalist is likely to mention it.

I wanted to interview Charney again, to talk not about his lifestyle but about his business. Before our first meeting, American Apparel seemed to me to be a marquee example of a business that had positioned itself to respond to a rising tide of ethical, antibrand consumers. At a moment when practically every clothes maker was offshoring to cut costs, American Apparel made its wares at a U.S. factory in which the average industrial worker (usually a Latino immigrant) was paid between $12 and $13 an hour and got medical benefits. The company had taken out ads in little arty magazines, noting that it was "sweatshop free."

But the company had been criticized in The Nation magazine for resisting unionization, and when I asked Charney about it, he unleashed a vigorous response that drew on everything from free-market economics to the Magna Carta. There were 7,000 cut-and-sew factories in the Los Angeles area, he fumed; none were unionized, and American Apparel paid the best wages of any of them. The nonprofit Garment Worker Center did not back the effort to unionize American Apparel, and the San Francisco Chronicle reported that the center heard "few complaints from American Apparel workers, and those that come up are typically minor and resolved easily."

Charney's most forceful argument concerned the irony of the occasion for The Nation's piece: Another self-consciously ethical clothing brand, the union-friendly SweatX, had just gone out of business. The lesson of SweatX, Charney said, was that building a brand solely around a company's ethical practices was not a good strategy for reaching masses of consumers. The ethical sell was too limiting. It was a niche strategy, at best. Which was why American Apparel was moving away from the ethical sell to something very different.

Charney pulled out a copy of a book called The 48 Laws of Power and read me No. 13, which suggested that to get what you want, you must appeal to people's self-interest, not to their mercy. "That's the problem with the anti-sweatshop movement. You're not going to get customers walking into stores by asking for mercy and gratitude." If you want to sell something, ethical or otherwise, he said, snapping the book closed, "appeal to people's self-interest."

Consumer Ethics

There is plenty of evidence to suggest that Charney has a point. A whopping majority of American shoppers may consider themselves environmentalists, but, according to the Journal of Industrial Ecology, only 10% to 12% "actually go out of their way to purchase environmentally sound products." Similarly, Brandweek reported on a survey that found that even among consumers who called themselves "environmentally conscious," more than half could not name a single green brand.

Why the disconnect? Well, ask most people whether they care about the environment, and it's not particularly surprising that many would say yes. Ask whether they would back that up by "buying green" if they had the chance, and again, it's likely that very few would admit to being hypocrites by saying no. What we do in the marketplace is another matter.

There is a real-world overload of factors that confront consumers in the marketplace — price, quality, convenience, pleasure, plus the countless number of symbols that provide us with rationales to buy. The Yale Center for Customer Insights designed an experiment to test this phenomenon. It divided 108 subjects into two groups. Members of one group were presented with a straightforward consumer choice. Would they prefer to buy a vacuum cleaner (a utilitarian object) or a pair of jeans (a bit of a luxury), each of which was assigned the same price, $50? About 72% chose the vacuum cleaner. Members of the other group were told to imagine they had volunteered to spend three hours a week either teaching children in a homeless shelter or "improving the environment." They were asked to explain their choice, a process meant to prod them into engaging with the idea. Then they faced the vacuum-cleaner-or-jeans choice. In this group, a majority (57%) opted for the jeans.

Although very few of the subjects made the connection, the researchers concluded that "the opportunity to appear altruistic by committing to a charitable act in a prior task" gives us license to choose a luxury item. A similar set of studies indicates that subjects are more likely to splurge on fancier sunglasses or pricier concert tickets after giving to charity. If you buy ecological or green products or consume alternative health care or practice yoga, it's easy to conclude, "Hey, I've done my part."

Perhaps this is why many big companies and brands are not so much changing their products as adding new alternatives to their existing product mixes, or carving a small donation to charity out of their profit margins. Pepsi-Cola is testing an all-natural version of its flagship drink called Pepsi Raw, and Clorox has launched an eco-friendly line of cleaning products. The Bono-promoted (Product) Red initiative brands existing products that dedicate a portion of the purchase price to the Global Fund to Fight AIDS, Tuberculosis, and Malaria. There's even a (Product) Red version of the iPod.

These efforts add just enough options to the miles of retail shelves to give us all an ethical fix — to do our one good shopping deed. Then we can push our basket a little farther down the aisle, letting other rationales take over: Here's a bargain, here's a great product, here's something that I could probably get cheaper elsewhere, but as long as I'm here, I'll just get it — and here, yes, here is something ethical. I'll take one of those, too.

From sweatshop-free to skintight

American Apparel's approach to ethical behavior in the marketplace has evolved into something very different. The company has moved from a sweatshop-free image that appealed to a relatively small group of consumers to a much bigger customer base that may not know a thing about where or how the company's products are manufactured.

By the time I visited American Apparel's headquarters and factory in Los Angeles to meet with Charney a second time, the company had transitioned to an image soaked in youth and sex. This was apparent in its stores — where the decor often included things such as Penthouse covers — and in its print ads. Yes, some of these ads mentioned quality and the sweatshop-free angle, but usually in small type, under a photograph of a half-naked young woman. Charney himself had been sued by three former employees for sexual harassment. (Those suits were dropped or settled; a fourth case is still pending.)

The company's — and Charney's — image had gotten so much attention that nobody seemed to bother checking into how its actual business might have changed. So I met with Marty Bailey, the company's vice president of operations. Quiet, serious, soft-spoken, and fully clothed, Bailey was an industry veteran who had begun his long education in manufacturing efficiency — and the hard realities of globalization — with Fruit of the Loom more than 20 years earlier. He had come to see offshore outsourcing as a mixed proposition. He believed that its promised labor savings had been diluted by the costs of moving materials to the cheap-labor haven and back, and by sacrificed quality. He believed that with the right plan, a U.S. manufacturer could still make money.

American Apparel's factory was, he reckoned, the 41st manufacturing facility he had walked into with the mission of improving efficiency. The company was producing 32,000 pieces a day and struggling to keep up with orders. In months, Bailey's system was churning out 90,000 pieces a day and would eventually reach 250,000. While the company was projecting an air of almost reckless decadence in its ads, it was quietly building a thriving made-in-America business model.

Its ads may have a decadent air, but its business model is thriving.

Eventually, I ended up in Charney's office, just in time, it would turn out, to witness an underwear fitting. He had concluded that — whatever the polls might say — ethical consumers were a niche. And he wasn't going to sell as many T-shirts as he wanted by targeting a niche; he wanted a generation. "We make sexy T-shirts for young people," he summarized.

Charney maintained that his provocative advertising, which some have called soft-core pornography, is honest. The women in the ads weren't models; many were customers and a few were employees. "Young people like honesty," he said. (Earlier, a member of the company's marketing department had showed me images that customers themselves sent in, essentially auditioning to be in the next squalid American Apparel ad.) He avoided the strategy of a logo that would broadcast status: an eco-badge, a cool badge, or any other sort of visible badge. His T-shirts had more to do with personal narratives than with impressing strangers. Finally, as Charney pointed out, the new image had hardly alienated young women; they were the main driver of his sales.

The conversation paused when two designers working on men's underwear appeared. They had just come from the factory floor, carrying several pairs of underwear that had been manufactured about 10 minutes earlier. Charney said they'd already gone through about 30 prototypes. "Imagine if we were outsourcing through China!"

He checked with me, then took off his pants and underwear and started trying on the samples. "I need a thin Sharpie," he said, taking off one pair and putting on another. He wrote on the removed pair: Good but tighter. There was a great deal of chatter about the legs and the waist, about taking in a half-inch, about the fact that the factory shift was going to end soon. "This is a great pair that I have on right now," Charney suddenly announced.

It's easy to get distracted by the mental image of a pantsless chief executive. But the moment offers a gritty snapshot of the company — both its notorious aspects and its less-heralded ones. It showed things that the public image obscured: responsiveness to customer requests, designers' excitement, the advantages of a short elevator ride from the shop floor to the CEO's office.

As we resumed the conversation, Charney pointed out that the newer and more aggressively attention-getting image did not mean that American Apparel had watered down its production practices — it just made less of an effort to tell consumers about them. The benefits the company offers to its workers had, in fact, increased. It still marketed the working conditions at American Apparel, but mostly in recruiting commercials that ran in Los Angeles and aimed at attracting the best available workers. (The waiting list for a manufacturing job there is a year long.)

It's not that he cares less about treating his workers ethically, Charney insisted; it's that he doesn't think trumpeting work conditions will help him compete. Sure, he hoped quality or social consciousness or a distaste for logos would each attract some consumers. But he also hoped that selling a sexed-up version of youth culture to young people would attract others, and hopefully in greater numbers. If ethics draws in some consumers, great. But for others who respond to different rationales, he'll provide those, too.

The product didn't change; the rationale for buying it did.

Excerpted from Buying In, by Rob Walker. Copyright 2008 by Rob Walker. Published by arrangement with Random House, an imprint of Random House Publishing Group, a division of Random House.

Employees at the American Apparel's Los Angeles factory. | photograph by Jeff Minton

A version of this article appeared in the June 2008 issue of Fast Company magazine.